What forces will shape responsible investing (RI) in 2023?
recent Report According to the Institute for Responsible Investment, “RI is deeply entrenched in Canada” with $3 trillion in assets under management. Consideration of environmental, social and governance (ESG) performance and goals has become a “fundamental tool” in decision-making for Canadian investors, the report said.
With ESG funds a key part of portfolios, investors can focus on five RI trends likely to emerge in 2023.
1. Green bonds are gaining momentum
Fixed-income instruments backing renewable energy or affordable housing have long attracted responsible investors. But RI specialist Ryan Fontaine at Assiniboine Credit Union Credential Securities in Winnipeg said access and pricing has proven challenging for many.
“Many firms have launched funds that provide access to diversification. Investors can capture higher yields at current interest rate levels.”
Investors also have plenty of options here, such as the Horizons S&P Green Bond Index ETF (HGGB-T type) mutual funds like CI Global Green Bond Fund.
2. Embrace sustainable investing without volatility
ESG and sustainability funds offering exposure to broad, diversified indices are plentiful. Matthew Soegtrop, director of RI at BMO Private Wealth in Toronto, said those investments are prone to the same downside volatility that the broader market has experienced in 2022.
“Expect more products that not only have a sustainability factor but also a value factor,” Mr Soegtrop said.
The funds will hold less volatile stocks that are less negatively impacted by high inflation, rising interest rates and declining economic conditions, he added.
Investors already have a number of options in this space, including the Invesco S&P 500 Low Volatility ETF (ULV-FT) and Sun Life MFS Low Volatility Global Equity Fund in mutual funds.
3. Fission has a mission
Renewables such as wind and solar may not be able to fill the energy vacuum created by phasing out fossil fuels, says Steen Rasmussen, author of Carboncredits.com in Vancouver. That could put the focus on nuclear energy.
“Uranium may fill part of the gap because it’s relatively clean from a climate change perspective,” Mr Rasmussen said.
There has been renewed interest from North American producers, especially since the outbreak of the war in Ukraine. Kazakhstan is the world’s largest uranium producer, with Russia ranking sixth. In 2021, the United States will buy nearly half of its uranium supply from these countries. Institutional investors bought a lot of commodities early in the conflict, fearful of potential supply disruptions. “The United States is looking for a secure supply of uranium,” Mr Rasmussen said.
Cameco Corporation in Saskatoon (CCO-T), which mine some of the largest and richest deposits in the world, will likely see Increase in demand from the western world.
4. More screening for fossil fuels
While the energy sector has bounced back, growth in fossil fuel-free funds is unlikely to abate through 2023. “As investors seek more climate-friendly portfolios, more companies are issuing these funds,” Mr Fontaine said.
New entrants include CIBC’s line of sustainable funds, which includes its Sustainable Canadian Equity Fund (CEIBS New Energy). It screens out oil and gas companies while limiting exposure to other holdings in the portfolio that still generate revenue from the services sector.
5. Wash the green
In 2022, greenwashing is at the forefront as major investors label ESG as a window dressing to attract capital. Regulators are also looking more closely at greenwashing, said Tim Nash, the Toronto-based founder of Good Investing, a financial planning firm that specializes in RI.
“The Canadian Securities Authority has recently notified issuers of greenwashing,” he said. “In other countries we’ve seen companies get fined for misleading claims, and Canada seems to be facing that as well, which is a good thing.”
Mr Soegtrop agrees that the increased focus on greenwashing will have a positive impact on RI, showing its evolution from a qualitative to a quantitative indicator.
“It’s not enough to make demands; you need to support them,” Mr Soegtrop said. “Increasingly, investors will demand to see quantitative data to ensure that asset managers are not engaging in greenwashing.”